Badger Meter, Inc.

Good morning, and thank you for joining the Badger Meter fourth quarter and full year 2021 earnings conference call. On the call with me today are Ken Bockhorst, Chairman, President, and Chief Executive Officer, and Bob Brockledge, Chief Financial Officer. The earnings release and related slide presentation are available on our website. Quickly, I'll cover the safe harbor, reminding you that any forward-looking statements made during this call are subject to various risks and uncertainties. the most important of which are outlined in our press release and SEC filings. On today's call, we will refer to certain non-GAAP financial metrics. Our earnings slides provide a reconciliation of the GAAP to non-GAAP financial metrics used. Finally, during this call, we will refer to core results for various financial metrics, for example, core utility water sales. Core means the designated financial metric excluding the year-over-year impact of the USCAN and ATI acquisitions. We believe this reference point is important for year-over-year comparability. With that, I'll turn the call over to Ken.

Thanks, Karen, and thank you for joining our fourth quarter earnings call. Our strong fourth quarter results capped off a record year for BadgerMeter with sales surpassing $500 million for the first time in our history. We executed well on many fronts this past year, including successfully integrating two highly complimentary water quality acquisitions, adeptly managing ever-changing supply chain challenges and the lingering impacts of the pandemic, and implementing value-based pricing and other actions to offset inflationary pressures. I want to thank the Badger Meter team globally for their tremendous execution and focus on the customer. I'll recap the year and talk about the current environment and our market outlook later in the call. But for now, let me turn the call over to Bob to go through the details of the quarter.

Thanks, Ken, and good morning, everyone. Turning to slide four, our total sales for the fourth quarter were $135.7 million, an increase of 20.8% over the $112.3 million in the same period last year. Total utility water product line sales increased 23.4%. Acquisition-related water quality sales totaled $11.1 million in the quarter, compared to 2.4 million last year, which included only two months of SCAN results. As a reminder, as we move into 2022, we will anniversary the acquisitions in our reporting of results. Excluding the year over year benefit of the water quality acquisitions, core utility water revenues increased 14.4% as continued strong order demand and recovering production output was modestly offset by intermittent supply chain disruptions that continued to restrict backlog conversion. We experienced growth in cellular radio and beacon software as a service sales, and we continue to realize the benefit from strategic and value-based pricing actions. Strong order momentum continued in the fourth quarter of 2021, and we exited the year with yet another record high core backlog. Sales for the flow instrumentation product line increased 8.9% year over year, as steady demand trends across the majority of global end markets and applications was partially offset by supply constraints which limited production. We were very pleased with the margin performance in the quarter in light of widespread inflation and the dynamic supply chain impact on our manufacturing operations. Starting with gross margins, we increased gross margin dollars by $10.8 million year over year. As a percent of sales, gross margins improved 120 basis points to 40.4% from 39.2%. Margins benefited from favorable acquisition mix, as well as the higher volumes and positive product sales mix, namely higher radio and SAS revenues. In addition, the prior year included a non-recurring discrete network sunset provision. These factors combined more than offset the cost headwinds experienced across purchase components, including brass and electronics, as well as increased freight and logistics costs year over year. Looking forward, we anticipate continued inflation in 2022 that may constrain margins, with some comparative easing as the year progresses and as 2021 cost increases become anniversary. SEA expenses in the fourth quarter were $32 million, generally consistent with the quarterly absolute dollar spend throughout 2021. As a percent of sales, SEA was 23.6% in the quarter, a 50 basis point improvement year over year, and a 110 basis point improvement sequentially due to the higher sales. We expect SEA spend in 2022 to increase as a result of inflation, variable compensation, and ongoing growth investments, yet we continue to endeavor to improve SEA leverage as a percent of sales. As a result of the above, overall operating profit margin was 16.8%, a 170 basis point improvement compared to 15.1% in the prior year quarter. The income tax provision in the fourth quarter of 2021 was 24.5%. an increase over the prior year's 22.6% and within our normalized rate in the mid-20% range. In summary, EPS was 59 cents in the fourth quarter of 2021, an increase of 31% from the prior year's EPS of 45 cents. Working capital as a percent of sales was 24.5%, a decrease of 110 basis points compared to the prior quarter end. As expected, the temporary elevation in primary working capital we experienced last quarter did return to more normalized levels as we finished out the year. Free cash flow of $26.2 million was higher than the prior year's $12.7 million, the result of higher earnings and working capital recovery between years. For the full year, free cash flow was $80.8 million, and free cash flow conversion of net earnings was 133%. While moderated from the unsustainably high levels of the past two years, which reflect the structural benefit of low-hanging fruit efforts in the areas of primary working capital, this conversion rate exceeds our annual target of greater than 100% free cash flow conversion. With that, I'll turn the call back over to Ken.